Behind Ukraine's Political Strife: One Big Utility Bill

Cossacks stand guard at the entrance to the Crimean Parliament building on Friday in Simferopol, Ukraine. Russian Cossacks, some heavily armed, have taken up guard duties at road checkpoints, border crossings and other key facilities that were previously guarded by local, pro-Russian militants across Crimea in recent days.

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One way to understand the situation between Ukraine and Russia right now: Look at the gas bill of an ordinary Ukrainian.

Valentina Olachenka, for example, pays $19 a month for gas to heat her house and run her stove. The average American who uses natural gas, by contrast, spends more than $100 a month.

Gas is cheap for Ukrainians because the government is paying most of the bill — 87 cents of every dollar, according to the IMF.

The subsidy used to be relatively affordable for the government, back when Russia was giving Ukraine a really good deal on its gas. At the time, Russia got cheap access to Ukranian pipelines.

But as the governments of both countries have changed, relations have grown strained. About eight years ago, Russia increased the prices it charged Ukraine for gas. And rather than pass that cost onto its people, Ukraine's government chose to pay the difference. That created a big hole in Ukraine's budget.

Ukraine now spends 7.5 percent of its gross domestic product on the gas subsidy, according to a recent IMF estimate. Context: In the U.S., defense spending plus nondefense discretionary spending adds up to 7.5 percent of GDP

That brings us to the eve of the current crisis, when then-President Viktor Yanukovych tried to ease Ukraine's financial troubles by cutting a deal with Russia, for about $15 billion and a break on gas imports. This deal didn't go through and precipitated the president's ouster.

In the current conflict, Russia has threatened to cut off gas supplies to Ukraine and said Ukraine owes billions in unpaid gas bills.

If Ukraine ends up allied with the European Union and taking orders from the IMF, lots of changes will come to its economy. The subsidies will have to end. And gas bills for people like Valentina Olachenka will rise.

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MELISSA BLOCK, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

AUDIE CORNISH, HOST:

And I'm Audie Cornish. The situation between Ukraine and Russia remains tense. Russia today threatened to cut its supply of gas to Ukraine's citizens. It says Ukraine owes more than a billion dollars in back payments. Zoe Chace, of our Planet Money team, says the way to understand this latest development begins with a basic Ukrainian utility bill.

ZOE CHACE, BYLINE: Specifically, a gas bill. To explain it, I had to call Kryrlo Loukerenko, a Ukrainian journalist, to talk to his mom about her gas bill.

So is your mother there?

KRYRLO LOUKERENKO: Yeah, she is here.

CHACE: Would you put her on the phone just one minute?

MRS. OLEVECHKA: (Speaking foreign language).

CHACE: I had her son translate for me.

Mrs. Olevechka, how much do you pay for gas for your house?

MRS. OLEVECHKA: (Speaking foreign language)

CHACE: It ends up at $19 a month for heating and stove, her son tells me. And it's cold in Ukraine; $19 is a deal. The average U.S. home that uses natural gas is paying $113 a month this winter. Even adjusting for a small Ukrainian apartment, they are still getting a huge discount. And that's because the Ukrainian government pays for a huge chunk of its people's energy costs.

Douglas Rediker used to be on the board of the International Monetary Fund - the IMF; says this practice goes back several decades, to when Ukraine was a communist country, part of the Soviet Union. A thing people may forget about the Soviet Union, he says - no gas bills.

DOUGLAS REDIKER: Under communism, there were no companies and there were no corporations and so hence, there were no bills. Part of the deal with communism was that individuals received heating and electricity, and whatever else the state provided to them; and that they didn't pay for it - at least, not directly.

CHACE: When the Soviet Union fell, the new country of Ukraine had a lot to figure out.

REDIKER: They had to create a structure by which individuals started to pay for things instead of just receiving them for free.

CHACE: It was a difficult time. People were poor. Rather than introducing this brand-new thing - like, this is a gas bill and it's a lot of your income - the government made it more of a token amount.

REDIKER: So they created very, very low - and by extension, subsidized - pricing for that which everyone had come to assume was free.

CHACE: To do this, Ukraine turned to Russia. Russia has tons of oil and gas. That's basically what Russia is all about. And Ukraine has pipelines that Russia wants to use, to get its gas out to its customers. So the deal? It's pretty obvious: cheap gas from Russia, cheap pipeline access in Ukraine, cheap gas bills for Ukrainians.

And this worked out OK for awhile until Russia pulled out of the deal, about eight years ago.

REDIKER: Russia decided to raise the price of gas from an incredibly subsidized level to a more market-based price.

CHACE: No more cheap gas from Russia; Russia needed the money and didn't like the political direction Ukraine was headed in. But the gas bills for ordinary Ukrainians stayed cheap. How?

REDIKER: The government absorbs the cost. If you're paying more from your supplier, but you don't raise prices to your consumer, then that has - that price difference has to be borne by someone.

CHACE: Keeping gas prices cheap ate up more and more of Ukraine's budget until it was equal to 7.5 percent of that nation's economy. That's a lot. If Ukraine were the size of the U.S., here's what 7.5 percent looks like.

REDIKER: Our total defense spending plus our total non-defense discretionary spending. So imagine spending all of that just to provide cheap electricity and energy supplies to the people of America - nothing else. You can imagine how distorting that is of an overall economy.

CHACE: And how desperate that made Ukraine's government, and how broke. That brings us to the eve of the current crisis. A few months ago, then-Ukrainian President Viktor Yanukovych tries to ease the financial situation by cutting a deal with Russia for a $15 billion loan - and this other thing.

REDIKER: The other thing that he got was reduced energy prices. So it was a reduction of the price of natural gas, which would benefit Ukraine and the government because again, then the cost of those subsidies goes down because the cost to buy the gas goes down.

CHACE: That's what got us to today's crisis. Lots of Ukrainians don't want to deal with Russia for anything. They're trying to get out from under Russia's thumb, into the arms of Western Europe. Of course, by protesting an energy deal with Russia, that's functionally equivalent to marching on the streets for a higher gas bill. Journalist Kryrlo Loukerenko says lots of Ukrainians understand that there are higher gas bills in their future.

LOUKERENKO: Definitely, nobody wants to pay more. This is not my great desire to pay more for the gas, but I'm willing to pay more for the gas.

CHACE: Today's latest move by Russia threatening to cut off Ukraine's gas supply, you could see it as calling Ukraine's bluff. Here's what the future you're asking for looks like.